Monday, October 12, 2009

U.S. Indictment Underscores China’s Spy Ops

TAIPEI — The recent indictment of three Chinese nationals for alleged export violations of defense articles highlights China’s extensive industrial spying campaign and the vague, ineffective nature of U.S. control efforts, analysts say.

The U.S. Department of Justice (DoJ) announced the 38-count indictment Oct. 8, accusing the three Chinese nationals working for a company based in Shenzhen, China, with export violations of defense articles, money laundering and filing false tax reports.

From July 2005 to December 2008, Boston-based employees of Chitron Electronics filed “hundreds of false Shipper’s Export Declarations” for restricted “defense items” banned by the United States, according to the Oct. 8 indictment. The company is owned by Shenzhen Chi-Chuang Electronics.

“China is clearly engaged in a massive campaign of industrial espionage aimed at stealing American technology and intellectual property,” said Loren Thompson of the Arlington, Va.-based Lexington Institute.

The indictments call into question whether the U.S. Commerce Department’s Bureau of Industry and Security (BIS) adequately protects the export of sensitive items to China that are identified as dual-use.

“While the U.S. has adequate controls in overtly military technologies, dual-use items are harder to control or even classify,” Thompson said. “While state-directed theft is a serious issue, it is dwarfed by the volume of new technology that China acquires through legitimate commercial channels.”

The DoJ identified Chitron’s main customer as the Shanghai Academy of Spaceflight Technology (SAST), which conducts research, development and manufacturing of missiles and rockets. It is also on the U.S. Department of Commerce’s Entity List, a watch list of “entities subject to license requirements,” said the BIS Web site. There are 22 Chinese and 23 Hong Kong “entities” on the list.

The indictment states Chitron’s Web site promoted itself as a “company that could procure military products.” It further said that by 2007, “Chinese military-related institutions (including research institutes) in electronics and aerospace comprised 25 percent of Chitron­Shenzhen’s customers.”

The Hong Kong office served as a “transshipment point or shipping office; it was set up to act as a freight forwarder — to receive shipments from Chitron-US and reship or transship them to Mainland China thereby circumventing U.S. export laws and license requirements,” said DoJ.

A U.S. intelligence source, speaking on condition of anonymity, said, “This is a standard behavior we see from China’s Intelligence Services as well as their military-industrial complex.”

According to the Chitron Web site, the company was founded in 1996 by Wu, a “Harvard M.A. graduate,” in Shenzhen, China. Besides Boston, it has offices in Beijing, Chengdu, Hong Kong, Mianyang, Shanghai and Xi’an. In 2007-8, the company posted revenues of $25 million, with 10,000 line items with a value of more than $40 million.

Its Web site said it had a channel of 5,000 suppliers of semi­conductors and integrated circuits in the United States, Europe and Japan.

Greg Suchan, senior associate at Commonwealth Consulting, Wash­ington, said if the allegations against Chitron are true, “it is further evidence that we have stuff that the PRC [People’s Republic of China] wants and knows it can’t get through the export control system, and there are Chinese who will attempt to circumvent our laws to get that stuff.”

To make matters worse, the U.S. government “can’t even come up with a definition of what kind of microchip should not be exported to Chinese missile development institutes,” said John Tkacik, a former U.S. State Department official who served in China.

He said managing export controls of defense items to China has been a “charade” and a “fool’s errand for more than two decades.” The main reasons are that commercial exporters “complain that it hampers their profits” and “diplomats at the State Department complain that it annoys China.”

Tkacik said this has made “export control regulations too vague and outdated to be relevant, puts rival government agencies in the mix, fighting for rival priorities, and the real nail in the export-control coffin is ... underfunded export control management.”

The 2007 Authorization Validated End-User (VEU) program under the U.S. Commerce Department’s BIS helped loosen exports to pre-approved Chinese firms. In January, the BIS signed an agreement with China for the full implementation of the VEU program, making it even easier for Chinese companies to access dual-use technologies that have potential military applications.

BIS efforts to control exports to China have been a disaster, Tkacik said. “The U.S. Embassy in Beijing had a backlog of over 1,200 cases … [in March 2008], and their single Commerce Department export control investigator … could only close 12 cases a month. Commerce later said they had ‘doubled’ their investigators in China, meaning, going from one to two, which is still only two thumbs in a crumbling dike.”

The VEU program in China was “never intended to discover open flagrant violations,” but violations have been uncovered, said another former U.S. State Department official.